How to save up 25% down for multi family

Question

I am a 23 year old REI in KC, MO. Currently I am house hacking a SFH. I used a conventional 3% down and financed 97% of the purchase. I am looking to build my rental portfolio and would love to obtain a duplex-quadplex. The most ideal route currently would be to use a 5% down FHA to house hack a duplex with my girlfriend while continuing to rent my SFH. A solid duplex that my girlfriend is willing to live in is becoming hard to find so we may just buy a cheap SFH and make the payment ourselves to live in.

Despite the current situation, my lender and bank I work with is great but I know in order to buy a small multi family property I need 25% down and be able to show some reserves in the bank as well. I’m a full time nurse and make decent money, about 23$/hr after taxes. I am frugal and save almost everything but wondering how people scale up while needing 25% down?  It would take quite a bit of time to fund 25% down and like most people I want to obtain properties now! Haha.

If you have experience putting 25% down, are you saving money up in the account and just being patient for the right deal. Are you investing money in the stock market while waiting? I do not have enough equity to pull a line of credit currently but would like to utilize this strategy in the future. Let me know, thanks!

Taylor L. · Answer

Short answer: private money!

Long answer: find investors or partners who are willing to lend you money or to invest alongside you. This is how most of the big dogs are doing it these days. If you ever listen to a syndication podcast and someone says they "control 2,000 units," - that's because they didn't have all the money themselves! They raised money from investors. They don't own those 2,000 units themselves, but they do control the investment.

@Matt Faircloth's book Raising Private Capital will teach you all about this topic!

Dan H. · Answer

I do not understand why you would need 25% down if owner occupied.  For a non-owner occupied investment, 25% has become the standard but for owner occupied there are opportunities for significantly higher LTV.

As for how people scale the non owner occupied …   I already saw a response that indicated use other investors/partners but that is not the only option for other people's money.  Another option for other people's money is owner financing at higher LTV than the standard non-owner occupied LTV.

Then there is our preferred choice, because I am not a big fan of partners, value adds.  Basically the BRRRR.  Purchase, add value, refinance pulling the initial investment (or a significant percentage of the initial investment) out of the property.  Use the extracted money to repeat.  Typically we have not been able to extract all of our purchase and value add costs but we can get down to the same type of costs locked in the RE as an owner occupied RE (typically our cash used (purchase and value add costs) after the refinance is about 5% of the after value add value).  There are people who do BRRRR that extract out all of their costs, but in our market that is difficult for various reasons but the conservative refinance appraisal is the primary reason.

Good luck

Nigel Guisinger · Answer

Time is your weapon. Yes it’s great to move fast and big but in this game slow and steady wins the race. It’s a long game. You will naturally gain value in your portfolio via principle reduction and appreciation.  That mixture should get you around 25% of asset growth every four to five years. That means if you take it you can double the portfolio every five years taking your profits and growing. Yes you can do this faster but the best weapon you have for growth is time. Use it to your advantage.

Lee Ripma · Answer

@Steven May

I know everyone says FHA with 3.5% down but checkout 5% down convention loans for owner occupants. Think about ways to up your savings and more importantly increase your income. Also look into BRRRR where you can cash out the bulk of your capital.

Rob Massopust · Answer

Hi Steven:

Preaching to the choir. Yes trying to find a property where your wife or girlfriend will live is an underrated task. If you can find a property that is ok an in an up and coming area and you can build some equity then its a good way to go.

Your current house is a conventional loan you should not have an issue getting an FHA loan. Just tell them you are moving up, or closer to work etc

You can buy an 2-4 unit with just 3.5% down via FHA or Fannie Mae. Even better is the FHA 203k Rehab loan where its one loan to buy and build/rehab. ie: buy a duplex and build into a 4 plex etc. Find a national lender that does FHA that really knows the program. Local lenders think local they might not have the exposure to other markets. ie: any property under $400k does not need an appraisal, they really do not care the valuation, they are just going to keep rates low and over inflate the market, its best to buy as much as you can in anywhere except CA or NY!

Here is a house hack that you being a nurse might find to be a great "house hack". We are looking to furnished corporate housing to traveling medical professionals ie nurses. They are great tenants and make good money. Alot less hassle than Airbnb and about as profitable ie more than market rents, those above market rents may be able to get you into a property in a slightly better area. Near a major hospital is best. DM me and will send you some more research I have been doing. Its changed my game plan for sure.

MO is in a growth phase, do not worry about a bubble or the market, if the metrics work I would not worry about stretching abit. The upside, cash flow, depreciation and appreciation are poised to be huge for you long term.

What looks like a high price in your immediate market looks crazy cheap compared to my market, Los Angeles. My theory is we are all going to become so overpriced that we wish we bought 10- years ago. I kick myself for selling all my property in LA. It literally doubled in 5 years.

Also check out Unison.com https://www.unison.com/ - They do long term co-investing and match your down payment or even do 15% to avoid PMI. Not sure if they do your area but if you are long term and do not mind giving up future equity for cash today I think its a great way to build equity and buy property. They allow you to get 80% lTV with the best rates and no pmi and you keep the cash flow.

Keep us posted

Lawrence Zhou · Answer

@Steven May if you don’t currently have a FHA mortgage, you should check to see if either you or your girlfriend qualify for one. That way you could do a 3.5% down loan for a 2-4 family.

How to save up 25% down for multi family

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